Thursday, September 17, 2009

First-rate video journalism. China has seen 20 million migrant workers from the countryside lose their jobs in the past year and slip away back into the countryside. Factory owners seem typically to run away leaving only a paper notice that the business has closed. Stratfor has opined that disparities between city and countryside are the Achilles heel of the Chinese polity, and this video confirms that social unrest may be rising in the form of greater demands for “human rights.” Workers from the countryside are alleged to “forfeit their civil rights” when they migrate to the cities. As with America, the problem of collapse of effective demand is distributional in the near term. How is Chinese capitalism any different from the American variant, and why should the tendency toward neo-feudalism be any less--if not pronouncedly greater? This is the problem posed by “the end of history,” or the “triumph” of neo-liberal-conservative sometimes “democratic” capitalism.

Growth theory tells us that a dollar or Yuan saved is not necessarily lost to final demand—it may be spent on capital formation. The Chinese need only to use their savings internally instead of loaning them to us to achieve massive amounts of capital formation. The government is firing up big infrastructure programs to do just that, while blowing some of its other bucks on energy and resource deals worldwide while the greenback is still worth anything.

I taught in Taiwan about a dozen years ago in an executive MBA program. The buzz in that part of the world then was incredible. I was surprised at the attitude of the Taiwanese toward the mainland, which at that time was beating up on Taiwan verbally pretty badly, with all kinds of threats of taking them over.

Wednesday, September 16, 2009

While industrial production has turned up, and by NBER standards the recession may be over (they’ll decide well after the fact), industrial production will probably remain depressed for several years. Given the debt drag on the economy, the collapse of consumption and investment, industrial production isn’t likely to achieve 110+ levels for many years if my forecast of another round of deflationary collapse in about four years is correct.

Looking at percent changes from a year earlier for industrial production, real consumption spending, and real private fixed investment spending it is tempting to look for an accelerator-type pickup. Real consumption spending has been far more stable than either of the other series. But real consumption spending is taking a beating from increased saving, slow-to-no wage growth, and yet-increasing unemployment, and real estate investment spending on construction isn’t coming back soon, so any accelerator effect (derived demand for investment spending) is likely to be muted.

Data to August 2009 except for investment which is quarterly to 2009Q2.

Via: Huffington Post This is amazing. The AMA doesn’t even represent the doctors! Who the hell can you believe anymore?

The Obama presidency is failing. If the President doesn’t take this study in his hand and demand a public option he is even more of a wimp than he appears. For a few weeks last fall, I suspended disbelief and gave him time to prove that his political instincts were better than mine, that he was going to clean up Wall Street and get health reform by waiting for the parade before jumping in front of it. But now it is clear that he is simply cowed, afraid to go up against the oligarchs in finance and health insurance. Any and all opposition to Beltway business-as-usual is being painted as lunatic fringe (and I wonder how much of it is staged by fifth column agents). The body politic is very cagily being quartered, using the same old fake polarities of “Republican” and “Democrat,” “liberal” and “conservative,” when the real party in power, the Money Party, is pulling the strings and the people are still dancing to Ronnie Reagan’s Hollywood dream-song, thinking that they will be the ones to win the lottery, and that government is always their enemy…. The American people let this government happen, the American people will have to unseat it.

A new study finds that a majority of physicians support the creation of a public health care option.

A Robert Wood Johnson Foundation (RWJF) study published in Monday's New England Journal of Medicine shows that 63 percent of physicians support a health reform proposal that includes both a public option and traditional private insurance. If the additional 10 percent of doctors who support an entirely public health system are included, then approximately three out of four physicians nationwide support inclusion of a public option. Only 27 percent support a private-only reform that would provide subsidies for low-income individuals to purchase private insurance.

Surveying a nationally representative sample of 2,130 physicians across America, researchers Salomeh Keyhani, M.D., M.P.H., and Alex Federman, M.D., M.P.H., from Mount Sinai School of Medicine in New York City queried physicians about a range of options for expanding health insurance coverage.

"There should be no confusion about where doctors stand in the debate over expanding health insurance coverage: they want reform," said Risa Lavizzo-Mourey, president and CEO of the Robert Wood Johnson Foundation. "This survey reveals important information about the perspective of physicians on issues central to the health reform debate. Policy makers should listen to their doctors."

"We found that no matter how you sliced the data, physicians demonstrated majority support for a public health insurance option, regardless of their type of practice or where they live," said Keyhani.

Among those physicians who identified themselves as members of the American Medical Association, 62.2 percent favored both the public and private options. The AMA has opposed a public option, saying that it "threatens to restrict patient choice by driving out private insurers."

A majority of physicians surveyed (58 percent) also supported expanding Medicare eligibility to those between the ages of 55 and 64.

"These results give voice to individual physicians in the national discussion about health reform," said Federman. "Most often we hear the opinions of special interest groups rather than doctors themselves, but we know that Americans want to hear the opinions of doctors like those who treat them. This study lets us hear the unfiltered views of physicians on key elements of health reform and should be useful for lawmakers."

Monday, September 14, 2009

Tim Duy offers some dyspeptic comments on confidence and consumption similar to my own a few days ago. However, he (and the rest of mainstream economics) continue to ignore research (however obscure) indicating the adaptation level theoretic foundations of confidence determination (reference). Duy’s nice graph of year-over-year real consumption spending against the University of Michigan sentiment series inspired a similar effort with the “animal spirits” indicator that shows that real consumption spending is about to enter a growth phase. The contemporaneous correlation of YOY real C and “animal spirits” is about 0.63; the regression with constant has an adjusted R^2 of about 0.33. But the “animal spirits” indicator has proven extremely sensitive to turning points and trends, more so than the Michigan series.

This is consistent with my general view that the U.S. economy is entering a relatively brief “anti-deflationary” reflationary bubble that will resemble an ordinary business cycle except for the elephant in the room, namely, a growing national debt-to-GDP ratio coming on top of record levels of the ratio. If I had to bet on whether private sector deleveraging will outrun public sector leveraging, I would bet not. Not enough private debt is being written off. The U.S. has more debt than it can service now (see Comstock’s piece). In 1933 we were the world’s greatest creditor and could borrow easily. Today our currency is at risk of substantial depreciation. Our social contract is broken, with extreme inequality in incomes and wealth and a general self-defeating distrust of government by the disenfranchised. Our deflationary collapse has only stalled. The tragedy is that the rising “animal spirits” of the next several years will probably guarantee that no meaningful reform takes place—of the financial sector, of the government’s priorities and budget, perhaps even of health care. In this environment both fiscal stimulus and quantitative easing are fool’s games. The government should provide health care and livable workfare to the unemployed and limit any increase in spending. America is a basket case but the government won’t admit it.

Real consumption should grow 2.0-2.5 percent over the coming year, and may accelerate to about 5 percent YOY growth over the next four years, before the next downturn. Here’s the chart:

Friday, September 11, 2009

What Happens If The Yuan Replaces The Dollar As The Main Reserve Currency

Published on:

Wednesday, September 09, 2009

Written by:

Keith Fitz-Gerald

The chance that the dollar will be replaced by the Chinese yuan seems to be growing, as is China's determination to make it happen. With China's banking system holding 25 times the reserves of the US Federal Reserve, and the US adding trillions more to their debt, the days of the dollar's dominance may be nearing an end.

[snip]

The list of potential implications is very long, and includes several scenarios that are almost apocalyptic. But most of the outcomes raise as many questions as they answer. Let’s consider the Top Five:

Global Gloom Leads to U.S. Doom: The U.S. dollar goes into freefall for the simple reason that if no country has to hold dollars any longer, they won’t. Instead – thanks to the ragged state of the U.S. government’s finances – many countries will dump greenbacks fast as they can, which will only put additional pressure on an already-strained U.S. financial system, which in turn will further damage our economy.

Inflation Inflates: Inflation will strike here with a vengeance, as anything bought, sold or priced in dollars will instantly rise in price to offset this fall.

Repatriation Risk: With the dollar serving as the world’s de facto currency, U.S. companies bear very little exchange rate risk when the time comes to repatriate assets or make currency-related adjustments. That would change overnight and prices throughout the value chains would rise sharply to compensate.

Money Costs More: The cost of money itself would rise. If the dollar falls, not only will there be massive selling pressure against it, but the cost of borrowing it will rise dramatically as lenders raise rates to cope with the increased risk of dollar-based transactions.

Death By Debt: And finally, if there is another reserve currency, other countries will no longer have to buy our debt, and you can guess where that will leave us – especially given the fact that we’ve taken on trillions in new debt to help finance our way out of our current mess.

My best guess is that we won’t see any one of these things in isolation, but will instead experience a blending of several or all of them. To the extent that China continues to absorb our inflationary influences, buy our debt in measured doses and maintain its reserves, we’ll probably have a measured decline in the value of the dollar – but not the catastrophic fall many in the doom, gloom and boom crowd are predicting. At the same time, I also see the IMF change course in the next few years to reflect China’s increasingly substantial influence and monetary power.[…]

Corporate officers anddirectors were buying stock when the market hit bottom. What does it say that they're selling now?

By Colin Barr, senior writer

Last Updated: September 11, 2009: 7:27 AM ET

NEW YORK (Fortune) -- Can hundreds of stock-selling insiders be wrong?

The stock market has mounted an historic rally since it hit a low in March. The S&P 500 is up 55%, as U.S. job losses have slowed and credit markets have stabilized.

But against that improving backdrop, one indicator has turned distinctly bearish: Corporate officers and directors have been selling shares at a pace last seen just before the onset of the subprime malaise two years ago.

While a wave of insider selling doesn't necessarily foretell a stock market downturn, it suggests that those with the first read on business trends don't believe current stock prices are justified by economic fundamentals.

"It's not a very complicated story," said Charles Biderman, who runs market research firm Trim Tabs. "Insiders know better than you and me. If prices are too high, they sell."

Biderman, who says there were $31 worth of insider stock sales in August for every $1 of insider buys, isn't the only one who has taken note. Ben Silverman, director of research at the InsiderScore.com web site that tracks trading action, said insiders are selling at their most aggressive clip since the summer of 2007.

Silverman said the "orgy of selling" is noteworthy because corporate insiders were aggressive buyers of the market's spring dip. The S&P 500 dropped as low as 666 in early March before the recent rally took it back above 1,000.

"That was a great call," Silverman said. "They were buying when prices were low, so it makes sense to look at what they're doing now that prices are higher."

Straightforward trading

In the case of firms such as discount broker TD Ameritrade (AMTD), they are selling with abandon. Chairman Joe Moglia has netted more than $10 million in profits from stock sales since April, by selling shares on each of the last 106 business days, according to Securities and Exchange Commission filings.

A TD Ameritrade spokeswoman said Moglia's sales are being made under a pre-arranged selling plan he filed with the SEC last August. Under that plan, his brokers exercise some options he got eight years ago and sell the underlying shares every day the company's stock price is above a certain level.

Moglia's not the only insider selling at TD Ameritrade. The company's founder and former chairman, Joe Ricketts, and his wife Marlene last month sold 5.7 million shares to help fund the family's purchase of the Chicago Cubs baseball team. They owned 16% of the company's stock at last count.

Silverman said the TD Ameritrade insider sales don't particularly raise concerns about the company's health, because "special circumstances" -- the Cubs deal and the pending expiration of Moglia's options -- are evident.

He said it's potentially more worrisome when insiders suddenly make big sales without obvious motivating factors.

Fossil (FOSL) CEO Tom Kartsotis has sold $25 million of the watchmaker's stock over the past month. Shares of Fossil have more than doubled since early March. Fossil didn't immediately return a call seeking comment.

At video game maker Activision Blizzard (ATVI), CEO Robert Kotick and director Brian Kelly each made more than $10 million last month by selling shares after exercisingstock options.

While some of Kotick's options were due to expire next year, others weren't due to expire until 2014 in his case and 2012 in Kelly's. The stock sales took place at prices that were about 50% above their 52-week low. Activision didn't respond to a request for comment.

Adding to the flurry of stock sales, companies are selling stock to the public at a brisk clip while buybacks have tailed off. All told, U.S. corporations have been net sellers of $105 billion of stock over the past four months, Biderman said.

Insiders have managed to cash in on some of those offerings. Healthcare payment administrator Emdeon (EM), for instance, last month raised $155 million in an initial public offering. At the same time, selling shareholders led by private equity investor General Atlantic Partners raised $188 million.

Though the wave of selling by insiders doesn't necessarily predict a pullback in their stocks or the market as a whole, it's hard to put a happy spin on the recent trends.

"The disparity between buyers and sellers right now is vast," said Silverman. "That's the beauty of following insider trading -- these guys are talking with their checkbooks."

Thursday, September 10, 2009

Data monthly to July. With Total Capacity Utilization at 69 percent and still very high levels of uncertainty in the financial markets, it is difficult to see investment spending adding much of a kicker to aggregate demand. The political will for much additional government stimulus spending appears to be lacking. Net exports are constrained by economic weakness abroad. Consumption spending will continue to be depressed by increased saving and additions to the ranks of the unemployed, especially those not covered by unemployment insurance, and shrinking overall employment. Hence, an L-shaped recovery appears likely in the intermediate term. A further debt-deflationary collapse may follow in about five years.

As measured by the BLS, inflation appears to have returned to an Oh-Oh Decade trend rate of ~2.5 percent. Declining value of the dollar will put pressure on inflation through import prices, constraining physical demands and further discouraging investment.

Tuesday, September 8, 2009

By Ambrose Evans-Pritchard Economics Last updated: September 7th, 2009

China has issued what amounts to the "Beijing Put" on gold. You can make a lot of money, but you really can't lose.

I happened to see quite a bit of Cheng Siwei at the Ambrosetti Workshop, a gathering of politicians and global strategists at Lake Como, including a dinner at Villa d'Este last night at which he listened very attentively as a number of American guests tore President Obama's economic and health policy to shreds.

Mr Cheng was until recently Vice-Chairman of the Communist Party's Standing Committee, and is now a sort of economic ambassador for China around the world — a charming man, by the way, who left Hong Kong for mainland China in 1950 at the age of 16, as young idealist eager to serve the revolution. Sixty years later, he calls himself simply "a survivior".

What he said about US monetary policy and gold – this bit on the record – would appear to validate the long-held belief of gold bugs that China has fundamentally lost confidence in the US dollar and is going to shift to a partial gold standard through reserve accumulation.

He played down other metals such as copper, saying that they could not double as a proxy currency or store of wealth.

"Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not stimulate the market," he said.

In other words, China is buying the dips, and will continue to do so as a systematic policy. His comment captures exactly what observation of gold price action suggests is happening. Every time it looks as if the bullion market is going to buckle, some big force steps in from the unknown.

Investors long-suspected that it was China. We later discovered that Beijing had in fact doubled its gold reserves to 1054 tonnes. Fait accompli first. Announcement long after.

Standing back, you can see that the steady rise in gold over the last eight years to $994 an ounce last week – outperforming US equities fourfold, even with reinvested dividends – has roughly tracked the emergence of China as a superpower in foreign reserve holdings (now $2 trillion).

As I have written in today's paper, Mr Cheng (and Beijing) takes a dim view of Ben Bernanke's monetary experiments at the Federal Reserve.

"If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said.

This line of argument is by now well-known. Less understood is how much trouble the Fed's QE policies are causing in China itself, where they have vicariously set off a speculative boom on the Shanghai exchange and in property. Mr Cheng said mid-level house prices are now ten times incomes.

"If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise."

"Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down."

Of course, China cold end this problem by letting the yuan rise to its proper value, but China too is trapped. Wafer-thin profit margins on exports mean that vast chunks of Chinese industry would go bust if the yuan rose enough to close the trade surplus. China's exports were down 23pc in July from a year before even at the current exchange rate, and exports make up 40pc of GDP. "We have lost 20m jobs in this crisis," he said.

China's mercantilist export strategy has led the country into a cul-de-sac. China must continue to run its trade surplus. It must accumulate hundreds of billions more in reserves. Ergo, it must buy a great deal more gold.

• New jobs needed per month to keep up with population growth: 127,000 • Jobs lost in August 2009: 216,000 • Jobs needed to regain pre-recession unemployment levels: 9.4 million • Manufacturing jobs lost since the start of the recession: 2.0 million (14.6% of sector's jobs) • Construction jobs lost in the recession: 1.4 million (19%, nearly one in five construction jobs) • Mass layoffs (50 or more people by a single employer) in July 2009: 2,157; jobs lost: 206,791

UNEMPLOYMENT RATE: 9.7%

• Number unemployed: 14.9 million (up from 7.5 million in December 2007) • Underemployment rate: 16.8%; Share of workers un- or underemployed: roughly 1 in 6 • Under- and unemployed, marginally attached and involuntary part-time workers: 26.4 million • Unemployment rate, ages 16 to 24: 18.2% • Male unemployment: 10.9%; female unemployment: 8.2% • White unemployment: 8.9%; black unemployment: 15.1%; Hispanic unemployment: 13% • Unemployment rate, young college graduates: 5.9% (2nd worst on record); Worst recorded unemployment rate for young college graduates: 6.2% (1983) • Traditional ratio of young college grads' unemployment to overall rate: 50%; Current ratio: 70% • Portion of unemployed who have been jobless more than six months: one third • Average weekly unemployment benefit in July (including additional $25 per week from the American Recovery and Reinvestment Act): $332

STATES WITH DOUBLE-DIGIT UNEMPLOYMENT IN JULY, 2009: 16; WHEN THIS LAST HAPPENED: 1983

EXPECTED NEW SPENDING (12-MONTHS) FROM THE NEW $7.25 MINIMUM WAGE: $5.5 BILLION

• Share of minimum wage workers with high school diploma in 1979: 57.5%: Share in 2008: 72% • Workers getting a raise from latest minimum wage increase: 4.5 million • Share of affected workers with annual family income below $35,000: 57.1%; Share working at least 20 hours a week: 81.6% • Extent to which the minimum wage's real value is lower than in 1968: 17%

AMERICANS UNINSURED IN 2007: 45 MILLION

• Drop in children covered through parents' employers, 2000 to 2007: 3.4 million • Share of people under 65, with incomes in the top 20%, covered by employers in 2007: 86.4%; Share with incomes in the bottom 20%, covered by employers: 21.9% • Share of Hispanic workers who are uninsured: 39.8% • Percentage of under-65 Americans with employer-sponsored health insurance in 2000: 68.3%; In 2007: 62.9% • Average monthly cost of COBRA with American Recovery and Reinvestment Act subsidy: $370; Without American Recovery and Reinvestment Act subsidy: $1,057 • Rise in out-of-pocket spending for the 1% of adults with the greatest medical expenses, 2004-2007: 42% • Increase in health care premiums since 1999: 119% • Amount by which U.S. private health insurance administrative costs exceeded all Canadian national health spending in 2007: $25 billion** • Share of total U.S. health care costs paid by private insurers in 2007: 35% • Share of total health care costs paid by U.S. government in 2007: 46%

SHARE OF PEOPLE NEAR RETIREMENT AGE WITH A 401(K) BALANCE UNDER $40,000 IN 2007: 50%

• Percentage of amount needed to maintain living standards that is held by average 401(k) participant approaching retirement: 20-40% • Share of 401(k) assets estimated to be lost since 2007: 29%

WORKPLACES WITH NO CONTRACT MORE THAN THREE YEARS AFTER ELECTION IS WON: 25%

• Share of employers that interrogate workers in mandatory one-on-one meetings, 1999-2003: 63%; Share of employers that threaten workers in such meetings, 1999-2003: 54% • Increase in likelihood that firm will fail if unionized: 0% • U.S. manufacturing workers ranking on "value-added per employee," compared to 16 nations with higher compensation: 2

ANNUALIZED RATE OF ECONOMIC CONTRACTION, 2nd QUARTER, 2009: 1%

• Likely size of this contraction without the American Recovery and Reinvestment Act: 3-4% • Jobs lost with the American Recovery and Reinvestment Act, 2nd quarter, 2009: 1.3 million • Jobs that would have been lost without the American Recovery and Reinvestment Act, 2nd quarter, 2009: 1.8 million at least***

Friday, September 4, 2009

It is with a bit of trepidation that I present results of a “recession” forecasting model, using NBER-defined recession, in the current environment, with the tremendous debt overhang and the bite it is taking out of consumer purchasing power, not to mention the increased saving rate in America, and the collapse of debt-pyramided asset values around the world. However, the model captures the pulse of the postwar business cycle and has forecast the last two recessions in real time a year or more in advance, so I do believe it signals an intrinsic desire of the economy to return to some sort of normality, probably in the form of an L-shaped stabilization of the cycle in the near term, with perhaps some mild acceleration as measured by small gains on a small base in the intermediate term. The bad news is that the politicians will probably not address fundamental problems of fiscal imbalance and maldistribution of income, debt and wealth (which I believe is the cause of the current crisis—the social contract is broken). See Paul Farrell’s recent commentary on this. As I mentioned in the post on confidence levels, I believe the depression will hit bottom in about five years. The recession forecasting model should give ample warning of the oncoming collapse.

The 0.2 percentage point increase in the unemployment rate is not enough to throw rising “animal spirits” or confidence off track. Americans are still depressed by an unemployment rate higher than adaptation level but they are getting used to it. Given the forecasted path of unemployment shown in the graph I expect the current cycle to peak in early 2013 and then for a walloping fiscal debt crack-up to send us to the bottom of the current, still developing depression. Even with a much more bearish forecast for the unemployment rate the qualitative conclusions hold. Unemployment is forecast to rise for the next year.

Tuesday, September 1, 2009

Before commenting on the stock market, which everyone cares about, I must indulge a small obsession with the way that mainstream economists are able to ignore relevant research in psychology even when they are doing inherently psychological work themselves, and even when the relevant work in psychology was actually published by an economist—but in a journal with “psychology” in the title.

I refer of course to the article by Robert Shiller in Sunday’s New York Times, “An Echo Chamber of Boom and Bust,” which apparently resulted from Shiller talking to himself in his office. In their book on “animal spirits” Shiller and Akerlof ignore a seminal article in the Journal of Economic Psychology relating “animal spirits” to the first law of psychology, the Wundt Curve describing sensitivity to adaptation level. (see this and this). The obscure economist who wrote these papers might reasonably be really pissed off at the arrogance of Shiller and Akerlof. I have it on good authority that Shiller declined to respond to correspondence on the subject.

Paul Samuelson once said words to the effect that, "As economists, we don’t care what other people think of our work—we write for ourselves.”

I’m just a blogger, as Calculated Risk likes to say (and CR is someone who does respond to emails, BTW).

As August has come to a close and a lot of folks are looking for a stock market pullback (and yours truly is slightly bloody from a small –2 beta position on the NDX), I thought it would be appropriate to update the Coppock Guide and my own “animal spirits” of the stock market oscillator that are both monthly models.

The picture is pretty astoundingly bullish on a pure emotion basis. Of course, it would require a veritable tsunami of liquidity to float the market on top of an economy that is in a depression. But that’s what we have a Federal Reserve and Goldman Sachs for!

Here’s the picture:

Click on graph to see bigger image in new window.

Now, I am as blown away as anyone to think that the U.S. stock market would have the unmitigated chutzpah to complete a gigantic head-and-shoulders pattern by climbing another ~50 percent from today’s levels, but this is what the emotional nature of the market wants, and it’s what Ben Bernanke would most like to deliver. It might happen after the current pull back, as more economic indicators stabilize, and the dollar rallies on weakness in foreign economies.

It could be the bubble at the end of the age for America. The way things are going the next collapse, due by my reckoning in 2013 or 2014, will be worse than this one. The stock market will see new lows, in real terms if not in nominal terms. If, as many expect, the government responds to fiscal bankruptcy by starting a big hot war and getting an inflation or hyper-inflation going, the stock market could continue to go up.

Next “animal spirits” update will be after the unemployment rate data is released on Friday.